Toyota Can Pounce As A Weaker Yen Could Spell Trouble For Detroit

by Trefis Team
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Quick Take

  • Japan’s Parliament appoints Haruhiko Kuroda as new head of the Bank of Japan who supports the new PM’s policy of monetary easing to revive the economy.
  • The upcoming days could be reminiscent of the 1990s when a weak yen resulted in Japanese automakers offering cheap cars, which bodes well for automakers’ profitability.

The Detroit automakers have a new headache, and this time, they can’t do much about it. Japan’s Parliament has confirmed Mr. Haruhiko Kuroda as new head of the Bank of Japan. Mr. Kuroda supports the new PM’s policy of aggressive monetary easing to fight deflation and revive the economy by making the Japanese companies more competitive. [1]

The upcoming days could be reminiscent of the 1990s when a cheap yen resulted in Japanese automakers offering cars at prices American automakers simply could not compete with. Years of restructuring and cost cutting measures have made the American autos competitive once again, and the news of Mr. Kuroda’s appointment and policy views is not music to their ears.

Toyota Stands To Benefit

Among the Japanese automakers, Toyota Motors (NYSE:TM) is bound to gain the most due to a higher proportion of vehicles exported. The company exported more than 2 million vehicles in the previous year alone. Toyota’s products will become more affordable to foreign customers, which will help boost sales. At the same time, overseas profits will swell when translated back to the local currency. Even the vehicles produced by Toyota in North America will benefit since the automaker sources a significant portion of its parts from Japan.

Toyota’s net margins of <2% are one of the lowest within the automotive segment and a weak yen certainly bodes well for its profitability. Toyota has already upped the net income guidance for fiscal 2013 (April’12 – March’13) to a whopping 860 billion yen (~$9 billion) at the end of the third quarter. [2]

Since Prime Minister Shinzo Abe took office in December, the yen has fallen more than 20% against the greenback, and the PM is determined to weaken the yen even further. Toyota’s stock has also gained by a similar amount in the same time frame.

With Kuroda’s appointment, you can expect the yen to fall even further. The Japanese currency is still relatively strong when compared to its historical levels. Currently, a dollar yields about 95 yen. Between 2000 and 2008, a single U.S. dollar yielded more than 100 yen. It’s only after the 2008 crash that the yen became stronger as global investors flocked to pour their money into safer havens.

See our complete analysis for Toyota Motors here

More Flexibility With Higher Margins

Around the world, Toyota’s vehicles are safe choices – they offer a good value for money, have low maintenance and are fairly fuel efficient. Now, the automaker has the option to reduce prices or offer more freebies at the same price, or a combination of both, as the situation may demand.

Take the case of the Camry. Sales were down 9.6% in February. [3] To combat the slump, Toyota is now offering a zero-interest financing on all Camry sales. Similarly, it could look to offer greater incentives or throw in some add-ons for free for other models whenever the need arises. The higher margins allow room for all these adjustments. Earlier, all this would not have been possible.

We currently have a $105 price estimate for Toyota’s stock, which is in line with the current market price.

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  1. Haruhiko Kuroda confirmed as BOJ governor, March 15, 2013, []
  2. Toyota Investor Relations []
  3. Toyota Blinks on Camry Discounts After Sales Drop: Cars, March 6, 2013, []
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